An Introduction to Inheritance Tax Rules
The major difference between an inheritance tax and an estate tax lies in who pays the tax. People who receive money from a deceased person pay inheritance taxes, whereas the estate of the deceased person pays estate taxes. Beneficiaries may be exempt from paying inheritance taxes if they meet certain requirements.
When You Pay Taxes
Inheritors pay taxes after the executor of the estate divides assets in accordance with the deceased person's will. States generally tax inheritances based on the amount each individual receives. For example, if a state levies 5 percent on inheritances higher than $2 million, that percentage only comes into play on money you receive above that amount. If you inherit $3 million, you owe $50,000 in taxes, or 5 percent of the $1 million above the minimum. States usually have special forms for reporting this type of income during normal tax filings. States require payment of inheritance taxes between nine and 18 months after the person who bequeaths the assets passes away.
Nebraska, Iowa, Kentucky, Pennsylvania, Maryland and New Jersey have inheritance taxes, as of 2015. Maryland levies up to 10 percent, while Nebraska goes up to 18 percent. Every state has exemptions. Maryland and New Jersey represent the two states that tax both the estate and the inheritances that come from a deceased person's property and assets.
Spouses remain exempt from inheritance taxes in all six states that levy this type of tax. Descendants pay taxes in Nebraska and Pennsylvania. Domestic partners are exempt in New Jersey. Beneficiaries of life insurance policies are not liable for inheritance taxes if the policy pays beneficiaries directly rather than the estate of the deceased person.
Some assets, such as stocks or interest-bearing savings accounts, may require extra income tax payments for dividend income or capital gains from the sale of property. Stock inheritance may represent a tricky proposition since the inheritor did not pay for the stock initially. Someone who inherits stock may have to pay taxes on the full value of the sale rather than the difference between the purchase price paid for the shares and the final sale value given to inheritors.
As of 2015, six states levy inheritance taxes on people who receive income from an estate. The federal government does not have an inheritance tax, although estate taxes account for $22 billion in annual revenue. Maryland and New Jersey have both types of taxes, meaning these states tax the estate of someone who gives money to an heir as well as the recipients of that inheritance.
Discuss the tax implications of an inheritance with your accountant or tax professional. State laws vary, and some states may repeal or add inheritance taxes. A tax professional should know current laws and regulations to advise you accordingly.